Just as banks have been swallowing one another up, so have outsourcing companies: The industry has consolidated so much that experts can now quickly tick off the names of all the important providers.

Each year, about five or six outsourcing companies either withdraw from the business or are sold to larger firms. And far from expressing worry, experts are calling the rapid shrinkage a boon.

Service quality has gone up, said Michael Corbett, co-founder of a New York-based clearing house called the Outsourcing Institute.

"Companies that had been in the outsourcing field as a periphery of their business have been starting to see that that doesn't make sense anymore," he said.

With the bigger firms growing larger and more sophisticated, smaller providers have either developed niche businesses or come to realize, as Mr. Corbett said, that "It's not a field for a casual participant anymore."

At the same time, banks are relying more heavily on outsourcing, hiring vendors not just for core processing but for all types of information technology and other support services.

Paradoxically, while the phenomenon of outsourcing has been exploding, the field has been shrinking: of the 71 companies that handled bank processing in 1987, only 46 were still in business last year, according to an annual study conducted by Computer Based Solutions Inc., a New Orleans- based consulting firm.

M. Arthur Gillis, president of the firm, said the disappearance of marginal outsourcing providers has enhanced quality and value at the remaining ones.

"The little guys who were struggling to do it couldn't do it, and that meant the big guys could get better at it," Mr. Gillis said. "Some of the little guys found it better to be under the umbrella of a giant than to be on their own."

With fewer providers, talent pools are concentrated at large firms. Banks can benefit not only from the assembled expertise, but also from the price discounts that outsourcing giants can offer.

"We think it's important to get mass, because obviously the greater volume you have, the more economy of scale you can bring to the table," said Dean C. Schmelzer, an executive vice president at Fiserv Inc., Brookfield, Wis.

Fiserv has acquired 57 companies since its inception in 1984. It has bought service bureau companies and software companies, and has even purchased the outsourcing operations of several banks, including Mellon Bank Corp. of Pittsburgh and Citicorp.

Fiserv's idea, Mr. Schmelzer said, is that "you can take a competitor out of the marketplace and get them on your side."

Another benefit, he said, is that "the bigger we get, the more we're able to leverage our relationships with our vendors and bring a better price performance to the table."

A decade ago, it was common practice for banks with excess computer capacity to go into the outsourcing business to reap extra fees. But the headaches involved in servicing other banks have led most of them to exit the business.

Executives at banks and at outsourcing companies agree that the professional outsourcers are better equipped to handle necessary support, service, infrastructure, training, and documentation functions.

"We're not doing the outsourcing anymore," said Tilda Walsh, a spokeswoman for Mellon Bank Corp. of Pittsburgh. "We're just not in that business - we're a bank."

Among the outsourcing companies with more than 250 banking customers, only one - M&I Data Services, a unit of Marshall & Ilsley Corp. of Milwaukee - is a bank unit.

And banks are achieving savings in time and cost by using outside service providers, Mr. Schmelzer said. "I don't ever see us going back to where a lot of the banks are getting into the outsourcing business," he said.

When courting bank business, outsourcing companies emphasize that their services enable bankers to pay attention to more critical concerns, like increasing profitability, improving customer service, and developing alternative retail delivery channels.

"When companies like ours can provide leadership" in information technology areas, "that allows the banks to focus their resources on the business of banking," said Laura Newman, a spokeswoman for Alltel Information Services Inc., of Little Rock.

If the changes have freed banks to pay attention to core businesses, they have also prompted professional outsourcing companies to improve service as they pick up the slack from banks and other companies that have left the business.

"You may have fewer vendors going after business, but I think we're all getting much better," Mr. Schmelzer said.

Service offerings have become more comprehensive and diverse. Today, banks are farming out much more than just their bread-and-butter operations: Mr. Gillis has identified 26 services that outsourcers routinely provide, from item processing to call center and software support.

Some smaller outsourcers are staying afloat by offering specialized services. But larger companies are also getting into niche businesses.

Alltell, for instance, has started a new service called "millennium management," which helps banks adapt their computer systems for the year 2000. The company has also started a "virtual banking" unit to provide Internet support.

"As other technology issues pop up, there are going to be other opportunities," Ms. Newman said.

Nancy Schell, director of outsourcing at a Pittsburgh-based accounting firm called S.R. Snodgrass, said that her firm has been able to thrive by carving out a boutique business among community banks.

"In small towns, it's very hard to find people who are experts at what they're doing," Ms. Schell said. "The people on my staff are not people they could afford to hire."

Ms. Schell said her firm's 75 banking clients have gotten "big savings" through outsourcing, including costs of office space, computers, and staff training.

"I think initially a lot of banks did outsourcing if they were having problems, and now they're seeing it's just an efficiency," Ms. Schell said.

But the standardization of services has turned outsourcing into something of a commodity. And with competition for bank business fiercer than ever, outsourcing companies have tried to distinguish themselves through service extras or volume-based price breaks.

"What we are finding in outsourcing in general is that level of service is the key determinant in price, and variances in level of service can drive significant variances in price," said Keith L. Gibson, a partner in the Tampa office of KPMG Peat Marwick.

"For instance, if a client requests a four-hour response time 24 hours a day, seven days a week, on fix-when-broken kinds of services, that has a very significant effect on the price," Mr. Gibson said.

Clients who are satisfied with, say, a 10-hour response time during normal business hours will pay much less, he added.

But consultants and company officials said cost should not be the only factor banks consider when choosing a vendor. Most outsourcers echoed the sentiments of Craig Dees, a spokesman for Electronic Data Systems Corp., who said that his company "strives to provide value beyond cost reduction."

"We try to get our clients and prospective clients to understand that technology is not something that you just keep trying to squeeze the cost out of," Mr. Dees said.

And no matter how much an outsourcer purports to save for a bank, there will always be grumbling.

"If you have an in-house staff, you're always going to think you're not getting as much out of it as you want to," Mr. Dees said.

Even so, the consensus among banks and providers seems to be that the outsourcing industry has matured and continues to improve with age.

"Customers of outsourcers are better off today, outsourcers are much better off today, and the outsourcers who got out of the business are much better off today," Mr. Gillis said.

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